This newspaper has always supported stronger Nordic cooperation between governments and companies and this was seen in a recent December 2019 seminar organised by Finland Ministry of finance and the Nordic Council.
They organised a seminar on two important subjects – “Has banking regulation been successful in the Nordic countries” and “Should the Nordic countries join the Banking Union”.
The seminar was based on several papers to be published later in the Nordic Economic Review where these two topics are important topics.
The academic writers of these papers were invited to speak before an audience of practitioners regulators central bankers and others, while a selection of relevant specialists were invited to review them.
This column deals with probably the most interesting paper from Professor Rangvid of Copenhagen Business School whose paper was entitled “How stable is the Nordic financial sector today?”
His conclusions were that past financial crisis 30 and 10 years ago are incredibly costly, and the failure to take immediate and appropriately robust action when there was a rapid increase in credit creation could have reduced the negative economic in the resulting crisis.
In his paper he analysed financial crisis in all four Nordic countries in 1990’s and in 2008.
In the first major financial crisis of the 1990’s he estimated that Sweden, Denmark and Norway lost one year’s GDP, whereas Finland lost around 2 year’s GDP. Its conclusion was that a more rapid increase of credit in Finland was the cause of much larger losses in that period. The absolute size of this loss has never before been reported with such clarity, and reflects poorly the lack of robust regulation and the weak state of the banks at that time. Taxpayers paid dearly for weak banks and weak regulators.
The author also introduced another element into his paper – a conclusion that regulators appear to be incapable of correctly predicting when a banking crisis will occur even when it is staring them in the face. He gave the example in 2008 when the central bank in Denmark claimed that the banking system was on a secure footing only to see the collapse of a major Danish bank just a few months later – click on the slide below to see it enlarged:
To her credit, The Finnish banking regulator, in her analysis of Rangvid’s paper. She also brought up the matter of the difficulty in predicting failures or risks in banking because “past performance is not necessarily indicative of future results”. She mentioned the dilemma of low rates where increases in interest rates would be stressful for households and if they stay low that would be stressful for banks… She also mentioned cybercrime and climate change as major new risk factors.
This last matter was not covered by Rangvid’s paper but it is just one more example of the sense of false security taxpayers may have when they read about the draconian stress tests that banks are now facing from regulators. The fact that losses from the banking sector can be equal to one or two year’s GDP is a very good reason to watch over and regulate banks carefully. Claims by the banks that regulation should be eased are not helpful. Regulators are needed and sufficient resources need to be allocated to them to ensure effective coverage because that is in the taxpayer’s interest.
Rangvid concluded that thanks have to a stronger capital base and better regulation things have improved. However, he noted that the relative amount of capital has remained remarkably stable because the leverage ratio has been stable. Even though the banks have better quality balance sheets, he is still concerned about the new risks like low and negative interest rates, climate change resulting in stranded assets, and cyber security.
Photo: Professor Rangvid’s Presentation
